40 lines
3.2 KiB
Plaintext
40 lines
3.2 KiB
Plaintext
294 Part Ill: Put Option Strategies
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In either strategy, one needs to be somewhat bullish, or at least neutral, on the
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underlying stock. If the underlying stock moves upward, the uncovered put writer
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will make a profit, possibly the entire amount of the premium received. If the under
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lying stock should be unchanged at expiration - a neutral situation - the put writer
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will profit by the amount of the time value premium received when he initially wrote
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the put. This could represent the maximum profit if the put was out-of-the-money
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initially, since that would mean that the entire put premium was composed of time
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value premium. For an in-the-money put, however, the time value premium would
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represent something less than the entire value of the option. These are similar qual
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ities to those inherent in covered call writing. If the stock moves up, the covered call
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writer can make his maximum profit. However, if the stock is unchanged at expira
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tion, he will make his maximum profit only if the stock is above the call's striking
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price. So, in either strategy, if the position is established with the stock above the
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striking price, there is a greater probability of achieving the maximum profit. This
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represents the less aggressive application: writing an out-of-the-money put initially,
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which is equivalent to the covered write of an in-the-money call.
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The more aggressive application of naked put writing is to write an in-the
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money put initially. The writer will receive a larger amount of premium dollars for
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the in-the-money put and, if the underlying stock advances far enough, he will thus
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make a large profit. By increasing his profit potential in this manner, he assumes
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more risk. If the underlying stock should fall, the in-the-money put writer will lose
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money more quickly than one who initially wrote an out-of-the-money put. Again,
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these facts were demonstrated much earlier with covered call writing. An in-the
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money covered call write affords more downside protection but less profit potential
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than does an out-of-the-money covered call write.
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It is fairly easy to summarize all of this by noting that in either the naked put
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writing strategy or the covered call writing strategy, a less aggressive position is estab
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lished when the stock is higher than the striking price of the written option. If the
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stock is below the striking price initially, a more aggressive position is created.
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There are, of course, some basic differences between covered call writing and
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naked put writing. First, the naked put write will generally require a smaller invest
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ment, since one is only collateralizing 20% of the stock price plus the put premium,
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as opposed to 50% for the covered call write on margin. Also, the naked put writer is
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not actually investing cash; collateral is used, so he may finance his naked put writing
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through the value of his present portfolio, whether it be stocks, bonds, or government
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securities. However, any losses would create a debit and might therefore cause him
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to disturb a portion of this portfolio. It should be pointed out that one can, ifhe wish
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es, write naked puts in a cash account by depositing cash or cash equivalents equal to
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the striking price of the put. This is called "cash-based put writing." The covered call |